How to Mitigate Reputational Risk

How to Mitigate Reputational Risk

For financial services firms, reputational damage can be fatal if reputational risk mitigation isn’t taken seriously. As legal expert David Engel explains, “Operational decisions taken today and tomorrow about how a business decides to treat its employees, suppliers and customers, could have long term reputational implications.”

In many cases of reputational harm, firms spend a significant amount of resources trying to retain existing clients and employees whilst fighting an uphill battle to attract new business and talent. It may seem unfair that firms can find their reputations tarnished within an instant by unfavorable headlines in the media or rank-and-file employees who blow the whistle, but this is a reality with which firms must contend.

4 Common Reputational Risks to Consider

In today’s fast-paced internet culture, negative news spreads like wildfire. For financial services firms, risks go beyond investors who post about being dissatisfied with returns. Consider the following potential negative circumstances which could impact your organization:

  • Regulatory actions: If your firm is under investigation for alleged wrongdoing, or is ultimately fined or sanctioned by the SEC, FINRA, a state securities regulator, or another entity, this news enters the public domain and can become a PR disaster.
  • An employee’s legal troubles: If someone associated with your firm makes the news for alleged criminal misconduct, it could affect your firm’s reputation. This is especially true if the employee or associated person is in a leadership position or a public-facing role, and if he or she is accused of financial misconduct.
  • Disregard for employee rights: Businesses in any industry face reputational risk when there are allegations that employees are not being treated fairly. For example, the #MeToo movement in 2018 and 2019 saw businesses battling reputational harm due to claims that employee harassment and other misconduct was ignored or tolerated.

A Step-by-Step Guide to Manage Reputational Risk

There is no way to completely avoid reputational harm. In truth, your firm could be in trouble despite having the strongest possible controls in place. However, the following steps can help limit your exposure and ensure you come out stronger on the other side of a negative story.

Step 1: Shore up your defenses

Make sure your legal and compliance teams have the resources they need. Conduct a reputational risk assessment to identify areas where problems could arise, evaluate existing controls, and implement mitigation measures appropriately. Each individual business unit should be empowered to manage its own risks and controls, with appropriate oversight from legal and compliance teams.

Step 2: Demonstrate organizational integrity

Integrity and goodwill won’t help your firm avoid reputational risk, but they can definitely help limit damage if your firm’s or an employee’s conduct threatens the organization’s reputation. This means treating clients and employees fairly and addressing complaints promptly. Many firms also seek to build goodwill and strengthen their brands through strong and consistent community service.

Step 3: Monitor social media and online reviews

A key aspect of reputational risk mitigation is staying on top of marketing and social media activity involving your firm. Implement procedures to manage the firm’s website and social media, as well as third-party “review” platforms. Procedures should include reviewing users’ interactions on the firm’s posts, responding to comments and questions as appropriate, and escalating potentially problematic activity to management, compliance, and/or legal. Firms should also strongly consider implementing social media policies for employees to define expectations and limitations.

Step 4: Ensure tech safeguards are in place

Your firm’s technology solutions should protect against the continuing threat of cyber security breaches. It’s imperative to leverage technology solutions that can help your firm proactively monitor potential risks before they become a problem.

Key Takeaway: Be Proactive

Taking a proactive approach to reputational risk mitigation is imperative. Firms must be able to flag potential issues before they become a problem and know the right ways to respond to minimize reputational damage after-the-fact. By following the steps outlined in this article, firms will be able to keep their reputations in tact.

We are committed to helping financial services firms manage risk with data-driven compliance software. To learn more, request a demo of ComplySci today.